Eddie Arrieta
Associate Research Analyst
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M2 money supply, as defined by the Federal Reserve, includes M1 (currency and coins held by the non-bank public, checkable deposits, and travelers’ checks) plus savings deposits (including money market deposit accounts), small time deposits under $100,000, and shares in retail money market mutual funds. M2 rapidly increased throughout 2020 and 2021 amid COVID-related monetary stimulus, to a peak of almost $22 trillion in July 2022. As the economy reopened and inflation accelerated — with headline CPI hitting a peak of 9% year-over-year in June 2022 — the Fed responded with a series of rate hikes and quantitative tightening measures. The result has been a rapid decrease in the money supply, with M2 down 3.6% year-over-year as of June 2023. The effects of the swift reduction in M2 have likely only begun to be felt, but a continued contraction — facilitated by higher-for-longer rates and continued quantitative tightening — could help cool inflation further and contribute to a soft landing for the economy.
Print PDF > Honey, I Shrunk the Money Supply
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